Financial Accounting Term Paper Project

Introduction and History
Costco Wholesale Corporation is an American global corporation that deals in membership warehouse club merchandise and is operational in up to eleven countries. The first warehouse for the company was opened in 1983 and a merger of Costco and Price Club took place in 1993 after the owner of Price Club warehouse turned down a merger offer from Walmart store chain, Sam’s Club. The combined company was named PriceCostco but the name was changed to Costco Wholesale Corporation in 1997. The company mostly deals in warehouses merchandise but also sells other products that are difficult to handle such as furniture, tires, caskets and arts among others. Some of the warehouses also provides services such as pharmacies and gas stations. The company boasts of over 230,000 employees and is a publicly traded company with headquarters in Washington, US. The company’s future goal is to become a globally recognized leader in its field of operation by providing quality to every area of business while also providing the best atmosphere for the employees to thrive and succeed.

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Horizontal Analysis of Balance Sheet and Income Statement
Based on the consolidated balance sheet, the company total assets for the financial year ending in Sep 3rd, 2017 increased by 9.60% to 36, 367 million from 33, 163 million in the previous financial year. During the same period, the company’s total liabilities also increased by 21.30% from 20, 831 million to 25, 268 million. The company net sales for the same period increased by 9% to $126, 172 million attributed to a 4% increase in the comparable sales and an extra week of sales in 2017. There were also sales from the company’s new warehouses that were opened in the period of the analysis. The revenue from the membership fee also increased by 8% to $2, 853 million as compared to the previous financial year as a result of new membership sign-ups in the new warehouses and an increase in the annual membership fee. Other factors that contributed to the increase in the membership fee revenues included an additional week of membership fees in the current financial year as well as an upgrade of the executive membership. In 2017, the company’s gross margin percentage reduced on two basis while the total net income increased by 14% to $2, 679 million.

Vertical Analysis of Balance Sheet and Income Statement
Based on the consolidated balance sheet, the company’s current assets contributed to 47.64% while property, equipment and other assets contributed to 52.36% of the total assets for the 2017 financial year. Cash and cash equivalents contributed to 12.50% of the total assets which is an increase from the 10.19% that was recorded in the previous year. The company’s accounts payable contributed the largest portion of the total liabilities accounting to 38.02%. This was an increase as compared to the previous financial year when the account payable accounted for 36.54% of the company’s total liabilities. Of the total revenue, the membership fees only contributed to 2.21% of the period of the analysis as compared to 2.22% which had been recorded in the previous year. The company also registered an increase in the total operating expenses as a portion of the total expenses for the period of the analysis. An increase in the interest expense as a portion of the total expenses was also registered.

Liabilities Worksheet
What is the amount of the company’s current liabilities?

• This year = 17, 495 million
• Last year = 15, 757 million

What is the amount of the company’s long-term liabilities?

• This year =6, 573 million
• Last year =4, 061 million

What is the amount of the company’s long-term debt that is due in 2018-2019?

• 2018 = 3, 256 million
• 2019 = 1, 394 million

Calculate the following ratios:
Current ratio = Current Assets / Current Liabilities

• Current year = 1.00
• Prior Year = 0.98

Debt to total Assets Ratio = Total Liabilities / Total Assets

• Current year = 0.28
• 2 Prior Year = 0.22

Times Interest Earned = (Net income + Interest Expense + Tax Expense) / Interest expense

• Current year = 28.3 x
• Prior Year = 26.4 x

Plant and Equipment Worksheet
Property, plant, and equipment

What depreciation method does the company use?

• Straight Line Method

2. What is the total amount of depreciation and amortization expense?

• Current year= $10, 180 million
• Prior year= $9, 124

Does the company report any intangible assets? What is the dollar amount?

• No, the company did not report any intangible assets

Does the company report any goodwill? If so, how much?

• No, The company did not report any godwill

List the Long-Lived assets

• Buildings, Equipment, Fixtures and Land

Analysis:

• Average useful life of plant assets = Cost of plant assets / Depreciation expense
  = 6 years
• Average age of plant assets = Accumulated Depreciation / Depreciation Expense
  = 5.5 years
• Asset turnover = Sales / Average Assets
  = 3.67
• Return on assets = Net income / Average Assets
  = 7.84

Equity Worksheet

• How many shares of common stock have been issued? 900,000,000
• How many shares are outstanding? 437,524,000 shares
• Does the company have any preferred stock outstanding? Yes
• If so, how many shares? 100,000,000 Par value 0.1 Dividend rate 2%

Further Analysis
Market Update: (Stock price this week) Price is 236.38 on date 13th March

Dividend payout ratio = Total cash dividends paid on common stock \ Net income

• Current Year= 5.6
• Last year = 6.1

Dividend yield = Dividends paid per share / Stock price at year-end (page 36)

• Current Year = 6.1
• Last year = 5.5

Earnings per share

• Current Year =3.2
• Last year = 2.5

Price-earnings ratio = Market price per share of stock at year-end / Earnings per share

• Current Year =2.1
• Last year = 2.5

Return on common stockholders’ equity = (Net income – preferred stock dividends) / Average common stockholders’ equity

• Current Year = 3.1
• Last year = 4.2

Statement of Cash flows Worksheet
What is the period covered by the statement? 2015- 2016

1. What was the ending balance of cash and cash equivalents in the current year? Does this agree with the ending balance of cash and cash equivalents reported on the balance sheet? 4, 546 million.

• Yes it is equivalent to the value reported on the balance sheet.

2. What was the net cash flow from investing activities?

• Was it an inflow or an outflow of cash? 2,366 million
• What was the net amount spent on property, plant and equipment? 1,973 million

3. What was the net cash flow from financing activities? 3,218 million

• Was it an inflow or an outflow of cash? Outflow
• What was the total cash dividends paid? 3, 334 million
• What was the total cash outlay for repurchase of common stock? 3, 536 million

4. What was the net cash flow from operating activities? 2, 449 million

• Was it an inflow or an outflow of cash? Outflow

5. Did the company use the direct or indirect method in reporting net cash flows from operating activities?

The company used direct method

• Current year = 2,305 million
• Last Year = 4,340 million

Analysis:
6. Free cash flow = Cash provided by operating activities – capital expenditures – debt repayments

• Current year 1.447 billion
• Last Year 1.3354 billion

Cash flow on Total Assets = Cash flow from operations/average total assets)

• Current year = 1.47
• Last Year = 2.19

Cash coverage of growth = Op Cash flow from operations/Cash outflow for plant assets

• Current year 4.2
• Last Year 3.5

Conclusion
The company’s asset turnover for the period of the analysis was 3.67 while the inventory turnover was 10.77. The receivables turnover was 91.31 while the day inventory was 30.93. Based on the analysis, it can be concluded that the company has a strong financial position based on the financial ratios such as ROA and Current ratio. The company also has strong efficiency ratios as discussed. The project clearly showed that the financial ratios of the company can be used in the determination of the performance of the company and used in making decisions of whether to invest or not to invest in the company.

Work Cited
“Costco Wholesale Corporation: 10K”. Sec.Gov, 2019,
https://www.sec.gov/Archives/edgar/data/909832/000090983217000014/cost10k90317.htm. Accessed 14 Mar 2019.